How Iran Tipped the Scales

The Iran conflict has repriced global rate expectations from cuts to holds. Here's what to expect from the Fed, ECB and BoE next week.

Next week, G3 central banks will hold their monetary policy meetings and release updated economic projections.

A Fed hold is widely anticipated, while markets are pricing in a cut in June and a 50% probability of a second cut by year-end. Powell’s tone is expected to be cautious — vigilant on inflation persistence from the oil shock, but stopping short of a hawkish pivot. The policy statement will likely reflect elevated inflation risks and a prolonged data-dependent approach, with no major departures from recent language. Notably, next week will almost certainly be the last meeting chaired by Powell. Some expect incoming chair Warsh to be more dovish given Trump’s pressure for cuts. However, we think this may not be the case.

The ECB is also expected to hold. Compared to the Fed, however, the market is currently pricing in more than one hike by year-end (with the hike to be delivered in September). This marks a decisive shift from prior to the conflict – rates were priced to be on hold throughout the whole year – due to Europe’s sensitivity to energy shocks which drive inflation higher. Recent comments by Governing Council members underline how the ECB will act decisively in a timely manner should energy prices be reflected into CPI medium-term estimates. Pre-war, the tone was neutral to dovish, with more of the concerns around growth. No changes are expected on the ongoing Quantitative Tightening and on the structural portfolio.

With inflation in Q4 projected to be 0.5-0.6% higher due to energy prices, the BoE is now also expected to hold. The February meeting had a narrow 5-4 hold vote split, which was dovish and closer than expected (economists had anticipated a clearer 7-2 hold). This surprise led the market to price a full cut in March. Recent events have therefore marked a material shift in rate expectations. The market is now pricing in no cuts at all for the remainder of the year. Regarding balance sheet normalisation, no changes are expected; the pace of ongoing normalisation may be reduced if rate holds persist.

Overall, the market had been anticipating neutral/cuts rate decisions across G3 central banks for this year. The Iran war has shifted expectations to the hawkish side. As with any situation like this, market expectations can change on a day-to-day basis. Stay tuned.

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